Thursday, February 04, 2010

Defense Contractors and International Development

Alanna Shaikh points out a trend and makes some good points about it. It seems that defense contractors are buying up smaller companies that contract to USAID. Shaikh wonders what that is likely to do to the shape of international development.

Let me provide some background for those who thought that it was mainly NGOs and other do-gooder organizations who did international development. This came as a surprise to me when I first recognized it, but there are companies that specialize in contracting to the US government to provide development services. And the management for those services. There are companies along the Washington Beltway that you may never have heard of, but they're vying to supply services of all kinds that may be needed in international development. And when the US gives a "grant" to a country for development, that grant generally must be spent in the United States. Unless the people with the grant understand quite a bit about American industry, they will probably get one of these firms to do the development work, rather than the industrial firms that actually engage in trade relevant to the expertise. So you might think that a mining company might have the most expertise to develop a waste-minimization solution for minerals processing, but a bunch of these Beltway types will bid on the contract.

Shaikh is writing about a new trend: the big defense firms (she mentions DynCorp and L-3) are buying up these smaller Beltway firms.

In one way, it's not new. In the 1980s, when defense budgets were going down and environmental restoration budgets were going up, the defense firms were buying up smaller environmental firms. Evidently the managers of the defense firms believe that international development budgets will increase for the next several years, which is a good thing.

Shaikh points out several not-so-good things: that the big companies will push the shape of international development toward the kinds of project they prefer, and that humanitarian considerations are likely to be trampled, along with all aid workers being tarred with the corporate brush.

On thinking back to the eighties, I can come up with another downside. The government contracting environment inherently has very little real competition, particularly for the big defense firms. The environmental technologies acquired during the eighties haven't been developed. The companies that might have developed them were absorbed into those big defense firms and disappeared. Whatever management innovations the smaller firms might have made didn't happen.

For the defense firms, there are two reasons to acquire smaller firms in a budgetarily "hot" area: to beef up their qualifications for government contracts and to eliminate competition. They did both of these quite effectively in the 1980s, but the benefits to the public in technology development and environmental cleanup were much less.

Looks like the managements liked the strategy, though.

1 comment:

molly said...

A third reason for defense firms to acquire smaller companies is that they are under pressure to grow their revenues quarterly and yearly for their stakeholders. Finding new governmental contracts and then working to increase their value in the future has proved to be a solid model for decades as is quite apparent in the latest proposed budget.